Inherited IRA

When an IRA owner dies, the account passes to the people or entities named on the beneficiary designation form, generally not through the will. A beneficiary other than the spouse cannot treat the account as their own. Instead, the assets move by trustee-to-trustee transfer into an inherited IRA, retitled along the lines of “Jane Smith, deceased, for the benefit of John Smith.” A non-spouse beneficiary of a workplace plan such as a 401(k) can use the same route, asking the plan to send their share by direct rollover into an inherited IRA.

Three rules follow from that status. You cannot add contributions or roll other money in. You cannot roll money out into your own IRA, and a distribution paid to you cannot be put back within 60 days the way an owner could. And you can always take more than the minimum, including the whole balance at once.

If the owner died in a year they owed a required minimum distribution and had not taken all of it, the beneficiary generally must take the rest.

If you are the sole beneficiary with an unlimited right to withdraw, you can treat the IRA as your own. Even as one of several beneficiaries, you can roll your share into your own IRA or, to the extent it is taxable, into a workplace plan. Either way it then follows the rules for your own account: RMDs start at your RMD age using the Uniform Lifetime Table, and withdrawals before 59½ face the 10% early-withdrawal penalty unless an exception applies.

Remaining a beneficiary with an inherited IRA instead keeps withdrawals penalty-free at any age, which matters to a widow or widower under 59½ who needs income. If your spouse died before their required beginning date and you are the sole beneficiary, you can also delay RMDs until the year your spouse would have reached RMD age. As the sole beneficiary, you are treated as having made the account your own if you add money to it or skip an RMD you owed as a beneficiary. A Roth IRA inherited by a spouse offers the same choices, and treating it as your own means no required distributions during your lifetime.

For owners who died in 2020 or later, the SECURE Act ties the schedule to who you are. Eligible designated beneficiaries can still stretch withdrawals over their life expectancy: the surviving spouse, the owner’s minor child, a disabled or chronically ill person, and anyone not more than 10 years younger than the owner. A minor child stretches only until 21, the age of majority set by the final regulations, and must then finish within 10 years. Every other individual, such as an adult child, grandchild or friend, falls under the 10-year rule, with annual minimums in years 1–9 if the owner had reached their required beginning date.

When the beneficiary is not a person, such as the owner’s estate, a charity or a trust that does not qualify to look through to its beneficiaries, older rules apply. The account must be emptied within five years if the owner died before the required beginning date, or paid out over the owner’s remaining life expectancy if the owner died on or after it. A Trust that qualifies instead uses its beneficiaries’ rules. Accounts inherited from owners who died in 2019 or earlier keep the prior stretch rules.

Withdrawals from an inherited traditional IRA are ordinary income to the beneficiary in the year taken, taxed at their own marginal rate. Unlike stocks or a house, the account gets no step-up in basis at death, because the pre-tax money was never taxed. Two rules soften the bill. If the owner made nondeductible contributions, that basis carries over and comes out tax-free, tracked on a separate Form 8606 that is never combined with the beneficiary’s own IRA basis. And if the owner’s estate paid federal estate tax, the beneficiary can deduct the share of that tax attributable to the IRA income in the year it is reported.

An inherited Roth IRA is usually tax-free: contributions always are, and earnings are too once the owner’s Roth has passed its five-year mark. It still has distribution deadlines, but a non-spouse beneficiary under the 10-year rule has no annual minimums, so the money can grow tax-free until the final year. Large taxable withdrawals can also push a retiree into a higher Medicare IRMAA tier two years later.

The costliest errors happen in the first months, while a family is still sorting out which rules apply, and few can be undone once money moves. Before requesting anything, confirm the account type, whether the owner had reached the required beginning date, and your beneficiary category. A missed required amount costs a 25% excise tax on the shortfall, cut to 10% if corrected within two years. The errors that come up most often: